Financial pros have devised many quick tools to gauge investment performance. The rule of 70 is one of those, enabling you to estimate in your head how well your investments will perform in the coming years. It isn’t an exact science, but it provides you with a framework to begin planning for your future.
Investors can use the rule of 70 for quick calculations when determining if a particular investment would help them reach their goals. This guide will explain the rule of 70 and go over some helpful information you should know when using it.
What Is the Rule of 70?
The purpose of the rule of 70 is to provide a rough outline of how long it will take an investment to double. The calculation involves dividing the number 70 by the investment’s growth rate.
When an individual invests $30,000 at a growth rate of 5%, for example, the calculation will be 70 divided by five. The result of this prediction is 14, which means it will take 14 years for $30,000 to grow into $60,000 at that rate.
Similar Ways to Estimate Investment Performance
The rule of 70 isn’t the only game in town to estimate how long an investment will take to double. You can use other calculations, depending on what you’re trying to measure. Figuring out which method you trust in certain cases is a good idea for any investor.
Rule of 69
The rule of 69 uses the same concept as the rule of 70, except you’ll divide 69 by the investment’s growth rate. The result is a $30,000 investment with a 5% growth rate taking 13.8 years to double instead of 14. Many investors believe the rule of 69 is more accurate when measuring continuously compounding processes, but they don’t use it as often because the calculation is more challenging to do in their heads.
Rule of 72
You can also apply the Rule of 72 to your investments in the same manner. Your estimate using the rule of 72 would suggest a $30,000 investment at 5% would take 14.4 years to double in value. This rule is more accurate when looking at less frequent compounding intervals.
Compound Annual Growth Rate
Another way to calculate investment performance is through its compound annual growth rate. This calculation is different because you’ll use your beginning balance, end goals, and timeline to determine the return rate you’ll need to achieve your plan. Using the two methods together can help you formulate an investment strategy that works for you.
You can use countless investment rules when developing your strategy, and having knowledge of as many of them as possible makes it easier to apply these methods to your portfolio. The rule of 70 is popular because it’s easy to remember and makes for simple calculations, while the others are a little more complex.
6 Things to Remember About the Rule of 70
The rule of 70 is meant to show you how long it will take to double your investment. Applying this information in a helpful manner is essential, though, because the data only benefits you if you use it wisely. Things you should know about this rule include:
1. The Calculations Aren’t Exact
The rule of 70 isn’t 100% accurate, nor is it meant to be an exact calculation. It’s vital to understand that this calculation is supposed to provide a rough estimate of how long a particular investment will take to double. Many variables could influence the investment’s actual growth rate in either direction.
2. Rule of 70 Limitations
There are limitations that you should remember when making these calculations. The most significant thing to remember is that the result is based on a specific return rate. Your actual rate of return could be higher or lower because it depends on the market.
3. It’s Meant to Be Easy
The rule of 70 is an accepted method of managing exponential growth concepts without requiring complex math equations. It applies to items in the financial sector as a quick and easy way to measure the potential growth rate of a portfolio.
4. You Can Make Adjustments
Using the information you find through the rule of 70 is just as important as the calculation itself. Seeing that a particular investment will take too long to double at its forecasted growth rate might be all the motivation you require to seek new ways to reach your goals. Your financial advisor can push you in the right direction if you find that your current investment strategy isn’t achieving your desired results.
5. The Rule Applies to All Portfolio Types
You can apply the rule of 70 to pretty much any investment. You’ll often see those with mutual funds or extensive retirement portfolios use this formula because it gives a clear outline of when they can expect to reach their financial goals. Having a timeline is particularly vital when dealing with retirement funds because the investor wants an idea of when it’s feasible to stop working.
6. It’s Applicable to GDPs
The rule of 70 is also applicable to large numbers like national GDPs. The calculation works much like with smaller personal investment numbers, as you can take a country’s gross domestic product and apply its forecasted growth rate to determine how long it will take for that nation’s GDP to double. This exercise could be helpful when investing in a particular country’s economy.
The rule of 70 isn’t perfect by any means, but it’s a valuable tool that provides you with a quick framework on how you can expect your investments to perform without any complex calculations. The result is greater insight into your finances, which should help as you plan for the future.
Get the Investment Advice You Need
Managing your investments and planning for retirement are complex issues that can add a lot of stress to your life. It’s highly recommended that you use the services of an experienced financial advisor to guide you through the tough decisions and maximize how your wealth grows over time.
Bogart Wealth offers investment management and retirement planning services in McLean, VA, and The Woodlands, TX. Our team can help map your financial future and assist as you meet your short-term and long-term financial goals. Contact our offices today to speak with an expert advisor.